CNOOC Woes Spotlight Environmental Perils

By newsdoug on August 25, 2011

CNOOC's Bohai oil headaches erode bottom line We’re getting a bit more color on the ongoing oil spill saga in the Bohai Bay, from CNOOC (HKEx: 883; NYSE: CEO), which has revised down its 2011 output target in light of the stubborn spill in the drilling project operated by ConocoPhillips (NYSE: COP) (English article) The company, one of China’s top 3 oil producers along with PetroChina (NYSE: PTR; HKEx: 857; Shanghai: 601857) and Sinopec (NYSE: SNP; HKEx: 386), said it will reduce its 2011 output target by up to 9 percent in light of the spill, which has seen persistent leeks spring up at the wells being drilled by ConocoPhillips, even as it reported its first-half profit rose 51 percent (company announcement) as it and its peers feasted off high global oil prices. CNOOC’s lowering of its output target spotlights its dependence on joint projects like the one with ConocoPhilliips, as well as its vulnerability to accidents like the one in Bohai Bay. What it hasn’t discussed, and what could potentially provide even more headaches in the coming months, is the issue of liability for the spill, which has become the subject of daily headlines in the Chinese media. A government environmental watchdog has already announced its intent to sue for damages, and buzz is building that the country needs to reform its system of financial penalties to provide adequate punishment. Under the current system, designed to protect state-owned firms that once dominated China’s business landscape, most fines are essentially meaningless because they are too small to seriously impact a company’s profits. If the system is revised, which looks likely, future liability for accidents at home could become a major new risk for not only CNOOC, but also any domestic or foreign energy company doing business in China.

Bottom line: The ongoing oil spill in the Bohai Bay will not only hurt CNOOC’s output this year, but could provide additional headaches in the form of longer-term liability.

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